Conventional Thinking and Denial

A term that everyone, especially in the investment world, should get familiar with is â€œnormalcy biasâ€.Â Described succinctly, itâ€™s the state of mind where people think that because something hasnâ€™t happened that it never will.Â People suffering from normalcy bias are often accused of having their heads in the sand about certain issues.Â They cherry-pick facts and evidence in order to reinforce their assumption that life will continue carrying on just as it has been in their experience.

This phenomenon, which is quite endemic, has led to some of the worst humanitarian and financial disasters in history.Â Children are often accused of having an â€œIt wonâ€™t happen to me!” attitude, but most adults are just as guilty of this.Â Consider the fact that many leading economists, congressmen and investment industry experts not only didnâ€™t foresee the 2008 housing market crash in the United States, but actively spent their time and resources coming up with reasons why it could never happen.Â This is hardly unique.Â In the late 1920â€™s many economists, including Irving Fisher claimed that the stock market had reached â€œa permanently high plateauâ€.

Canada is not immune from such denial and pie-in-the sky fantastical thinking.Â In the latest from the Financial Post, Andrew Coyne comes up with many of the same flimsy denials of a Canadian housing bubble as we saw in the United States.Â Experts that are correctly pointing out the massively distorted valuations in housing are dismissed as doomsayers.Â What evidence does Coyne present to support his case?Â Very little, in fact.

Coyne seems to actually believe that because the crash hasnâ€™t arrived, that it never will.Â History has proven this assumption wrong time and time again.Â As evidence supporting his case he cites articles going back to 2007 whose predictions havenâ€™t panned out yet.Â In the USA people were predicting a housing bubble as early as 1999.Â Were they wrong, or is it possible that there are people out there that understand finance and economics better than Andrew Coyne?

Another factoid that is brought up is that there are countries out there with people carrying debts that are higher as a multiple of their income than Canada.Â To that we only have to answer, so what?Â There were housing market crashes in countries all over the world (including the countries that Coyne cites!) where individuals had multiples both higher and lower than the present Canadian situation.Â This is hardly a convincing objection to those pointing out a bubble in housing.

The last item that is brought up is that mortgage costs are lower as a percentage of disposable income than they were in the early 1990â€™s.Â This couldnâ€™t possibly have anything to do with the record low interest rates could it?Â Weâ€™ll never know because Coyne never explores this issue any further than to trot out a single data point and make his claim.Â In the early 1990â€™s interest rates were more than triple what they are now. Â What would happen to this statistic if interest rates rose back to those levels, which it likely will when central bank stimulus programs end?

Whatâ€™s more important are the statistics that Coyne doesnâ€™t bring up.Â Never does he mention the fact that the amount of mortgages in arrears is greatly elevated or that home prices relative to income are many times higher than they were during the 1990 housing bubble.Â But why should he, when those facts donâ€™t fit in to the narrative that Coyne wants to create?

I wonder if the folks at the Bank of Canada are nothing more than doomsayers as well?Â After all, their latest report on the Canadian financial system certainly doesnâ€™t paint a pretty picture.Â If anything, this article is a great indicator that the evidence is tremendously strong that a bubble exists in the Canadian housing market.Â When the naysayers fall silent, resort to sophomoric caricatures or present woefully inadequate facts to defend their position you can be practically sure that the opposite is true.

Chris is an expert in business strategy, transformation and process improvement. Over the course of his career he has been instrumental in numerous successful multi-million dollar startups and strategic initiatives. He is a consultant to SME’s and large enterprises in the realms of finance, accounting, operations, tax, regulatory compliance, technology and risk management. Chris possesses Chartered Accountant and Chartered Professional Accountant designations and is certified by the Canadian Securities Institute as a partner, director and chief financial officer. Chris is also the Vice-Chair of the Mises Institute of Canada and an advisory board member of the Bitcoin Alliance of Canada. His company website is www.mycfoweb.ca.